Medical Loss Ratio

The Medical Loss Ratio (MLR) provision of the Affordable Care Act (ACA also known as Obamacare) is an important feature of the legislation. This provision requires that insurers pay out at least 80-85% of premium dollars in direct claim costs to providers of health care on their fully insured plans. Premiums must be spent on medical care and quality improvement programs for covered members. The balance (15-20%) is available for administration, risk charges, taxes, profit and the other costs to run the plan, including commissions.

Insurers must categorize clients as either individual, small group or large group for calculating and reporting any refunds due to the insureds as the required loss ratio is different for each category.

For employer groups, this is determined based on the average number of employees they had in 2017. This includes full-time, part-time and seasonal employees.

Insurers request verification of the number of employees annually. For example, Anthem is doing so in the next month. Brokers were told, “If we don’t hear from your clients, their company will be categorized based on the current membership numbers we have for them. Rebate status will be based on reported group size. No action is required of customers who are not fully insured“.

It is important that employers respond to this request as it will affect the amount of refund, if any is paid to the group. In some cases you may have many more employees than are actually enrolled.

According to the NAIC, National Association of Insurance Commissioners website, “ In 2011, insurers owed 12.8 million consumers a total of $1.1 billion in rebates. These numbers were significantly lower in 2013. In 2013, insurers owed 6.8 million consumers, almost half from 2011, a total of $332 million in rebates, less than a third of the 2011 total. A consumer would not receive a rebate if their insurer met the MLR requirements.” In 2016 Californians received over $17 million divided by about 31,000 members or $559 per person.

Employers are supposed to return these rebates to the insureds in proportion to the share of premium that was paid. The employer may also use the funds to reduce the participants’ portion of future premiums or enhance benefits in the plans.

It is important to note that if the amount is considered to be “de minimis” it need not be returned to the employee. This is not clearly defined by the rules, but generally amounts less than $20 per participant are considered to meet the definition of de minimis.

Regardless of how a plan fiduciary decides to apply the rebate, the allocation formula must be “reasonable, fair and objective.” COBRA participants are also considered eligible for distributions if they paid premiums in the prior year.

Cal-Cobra rules apply to groups of under 20 employees. In this case the terminated employee insured deals directly with the insurance company. The group may not know an employee has actually elected COBRA since the insurance company deals with them directly. If the amount is significant, the employer can contact the insurance company to find out if anyone elected COBRA during the prior year.

Department of Labor (DOL) does not require that employers have a written policy regarding distributions, but in the event of an audit by the DOL the employer should be able to document the amount of the rebate and the reasoning used to determine how it was distributed.

In my experience these rebates have not been very large, therefore most employers use it to offset the increased premiums they are being charged, rather than a complicated refund.

Margaret R. Beck
Margaret Beck  CLU, ChFC, CEBS started her insurance practice in Redding in 1978. As an insurance broker/consultant,  she represents businesses and individuals as their advocate.  She assists in choosing proper products, compliance with complex benefit laws and claims issues once coverage is placed. All information in her column is provided to the best of her knowledge, subject to final regulation by the respective agencies. Questions to be answered in this column can be submitted to [email protected]. Beck's column is also published in the Redding Record Searchlight.
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2 Responses

  1. Beverly Stafford says:

    I look forward to Sundays and your explanations of the maze known as insurance. Thanks.

  2. Richard Christoph says:

    What an incredibly complex industry. Thanks for helping us make a wee bit of sense of it all.

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